day 103

alice in wired world 7: the positive feedback of the software economy

Figure 1. Classical vs. FutureBusiness economies. Classical: Fluctuation in demand-price results in oscillation or business cycles. FutureBusiness: Supply-price obeys a learning curve which drives prices to a commodity level, and accelerates both demand and production. Yesterday: Something other than Keynes works for FutureBusiness. The most dramatic departure of the software economy from classical economics is the concept of a positive feedback mechanism that operates in the software age. It behaves just the opposite of friction, or negative feedback in classical economics. Here is how it works. Simplified diagrams of Keynesian versus non-Keynesian economics is shown in Figure 1. In Keynesian economics production dogs demand-- the manufacturer waits for demand to rise or fall before adjusting production. This delay introduces cycles and uncertainty into forecasting, and eventually into the supply/demand balance. In effect, adjusting the price point of a product in response to supply, produces a kind of drag or negative feedback on future supply. In classical economics, the Demand-Price equation is solved by initially estimating demand, setting a price, and then producing the product or service. At some later time (step 1, 2, ...), market feedback is used to adjust demand estimates which results in cranking production up or down. If the warehouse is overstocked, the perception is that demand has diminished, so the price is lowered to clear out the inventory -- production is curtailed, leading to less supply. Conversely, if demand is great, manufacturing and prices are stepped up to balance supply with demand. This takes time, hence a delay is introduced which leads to oscillations. For example, when the semiconductor industry book-to-bill ratio drops below 1.0, manufacturers decrease supply. When the ratio exceeds 1.0, supply is increased, and sometimes prices are, too (especially in the DRAM market space). Adjustments and their corresponding delays have produced cycles of up and down. This keeps captains of the semiconductor industry awake at night, so they have adopted a rule which partially moderates cycles: adjustments are kept in a range of plus or minus 20% per year. In contrast, the software economy model reverses this order -- demand effortlessly follows production. This leads to a radically different result. A company either mainstreams or dies. There is little in between. [Everything is fast in the software age, remember?]. How does this work?

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